Sunday, 22 December 2013

Gold and Silver simply needed a rest.

Let me start by stating that i really like Gold and Silver they are the only true forms of money. paper money is simply convenient and portable currency, it is not money as it is not a store of value.

My disagreement with the Gold and Silver bugs is not because i disagree with the whole Gold and Silver story and the ongoing long term bullmarket. It is just that i feel they are misreading a very obvious reality.

Gold Started its bullmarket move in 2001 and it was trading at circa $250 per ounce, it then had a very strong and sustained move up to 2012 when the price averaged $1700. I am not interested in short term price spikes, i am far more interested in the average prices over a period of time.

Silver started its bullmarket in 2001 and it was trading at circa $4.50 per ounce, it then had a very strong and sustained move up to 2011 where it averaged £35 per ounce.

Now by my calculation Gold had an increase in price from 2001 to 2012 of 580% and Silver had an increase in price of 677%. These are massive price moves in such a short period of time, i repeat massive price moves. These moves are also UNSUSTAINABLE

Ben Bernanke and company the BoJ, ECB and BoE are serial money printers, but they have not printed a volume of paper currency or electronic equivalents that justify these the type of price moves. The actual prices of Gold and Silver had been frontrunning the money printing and to an excessive degree, this meant that the prices achieved for Gold and Silver were at the peak a long way ahead of monetary reality and actual production costs.

This clearly meant that the market was ripe for a fall, back to at least fair value and probably as most markets traditionally react below fair value. I believe that this is where we are today, slightly below fair value. We know this because we can cross reference the market achievable price today for physical delivery, against the mine cost of production. We are now very probably at a good buy point.

I have no doubts that both Gold and Silver will increase in price this is because the very forces that caused this whole bullmarket in the first place are alive and kicking and actually intensifying. Many Gold and Silver bugs cry foul, that the game is rigged. I am certain that there is plenty of market manipulation, BUT believing all these stories and letting them cloud your investing decision making, is a grave mistake. If the market is manipulated downwards with large quantities of paper shorting. It cannot last for very long, and the backlash will very probably not only push the market back up to fair value but very probably way beyond.

This is because the artificially engineered low price, means the product is effectively ON SALE!. This will rapidly increase physical demand, which is exactly what we have been seeing, until not enough physical supply is available at the artificially set low price. At that point the paper market either resets higher to tempt out more physical supply and reduce physical demand OR IT DEFAULTS. At some point the manipulators also have to cover there shorts, and the only way to cover a short is to buy, this also adds buying demand.

It is said that the Central Banks have been leasing out there Gold, It is a free market they are quite entitled to do this. In my opinion not a very clever move, as the huge question remains will they be able to actually get all of there leased metal back? however at some point there will have to be a lot of physical buying by the Bullion Banks to give this metal back to the Central Banks. As well as other Central Banks buying as they build up there gold reserves.

Leasing adds artificial supply and therefore decreases price, as the central banks are effectively "SHORT" there own Gold, This is the Gold Conspiracy viewpoint.

Therefore when they have to cover there "SHORT" by buying and when other Central Banks purchase to raise there own reserves, this is artificial demand that could unfairly rapidly increase price? Is this also a conspiracy?!

The Central Banks are simply another large player in the Gold marketplace. Whatever they decide to do with there Gold is up to them, if they want to sell or lease this Gold that is there decision it is not market manipulation. Likewise if they decide to buy to increase reserves or cover out there leases, that again is not market manipulation. It is simply a large player carrying out transactions for whatever reason at a moment in time, within the Gold market.

Manipulation of free Gold and Silver Markets is when the Governments step forward with Tariffs,( India) sale restrictions ( France) and outright confiscation ( America in the 30,s).

By 2011 and 2012 Gold and Silver had entered "bubble" territory which meant that a lot of people correctly sold out and a lot of people who wanted to short these markets because of "bubble" prices stepped forward to short in large volumes. Hence the large price declines. The Gold and Silver markets were begging to be shorted!

Now we have a market that is actually close to or below the cost of production, so any further price reductions will be met with decreasing supply as mines shut in. We have a lot of shorts that need to cover and are now facing a trade with limited further profit potential, they are nervous. Many of these shorts may be asked for physical delivery and at a point where the physical market is extremely buoyant and very tight because these very same shorts have driven price to an unsustainable low level, actually below the cost of product production for many mines.

Something has to give and in my opinion it will be higher prices leading to increased supply and decreased demand. The shorts need to take Gold and Silver OFF SALE! therefore market equilibrium for a point in time, until we very probably once again have "bubble" prices leading to decreased demand meeting increased supply. This is how the markets work, booms like 2011/2012 and busts like 2013.

Manipulation cannot work over the long term, and if i am wrong how did Gold move from $250 to $1700? it would seem to suggest that the manipulators were very unsuccessful. Real manipulation is when they erect barriers against free trade and free markets, that is what we must be careful about, they may well do this as the economic situation worsens.